Sources of time varying return comovements during different economic regimes: evidence from the emerging Indian equity market

We study the economic and non-economic sources of stock return comovements
of the emerging Indian equity market and the developed equity markets of the US, UK, Germany, France, Canada and Japan. Our findings show that the probability of extreme comovements in the economic contraction regime is relatively higher than in the economic expansion regime. We show that international interest rates, inflation uncertainty and dividend yields are the main drivers of the asymmetric return comovements. Findings reported in the paper imply that the impact of interest rates and inflation on return comovements could be used for anticipating financial contagion and/or spillover effects.
This is particularly critical since during extreme market conditions, the tail return comovements can potentially reveal critical information for active portfolio management.